Short sales, in most cases, are one of the most economical solutions for all parties involved when a borrower can no longer afford their home. The bank typically incurs a smaller financial loss than would result from an ultimate foreclosure or continued delinquency on the mortgage payments. Borrowers may be able to soften the overall damage to their credit, and potentially settle future deficiency judgments. The big question on hand is.......What is life like after a short sale??
If you're married and your spouse has recently had a short sale, you may still be able to purchase a home.
For the majority of married couples, their homes are purchased together using joint credit, income and assets. This article will address the following situations; the spouse purchased a home before the couple was married in his/her name, or the spouse purchased a home, qualified on his/her own qualifications and the other spouse disclaimed their interest in the property.
Let's take a look at an example of what a typical scenario might look like for a typical borrower.
Mr. Smith bought a home in 2002. He was forced to do a short sale in 2008 because he lost his job and could only find employment that paid 50 percent of his previous income. When Mr. Smith purchased his home, he was able to qualify on his own and Mrs. Smith was not included on the loan. Mrs. Smith signed a disclaimer deed at the closing. Mrs. Smith has since graduated from medical school and returned to the workforce. Mr. Smith and Mrs. Smith would like to purchase a new home together. Unfortunately, Mr. Smith's credit will not allow him to be part of the loan due to the short sale. Even if Mr. Smith's credit score has rebounded from the effects of the short sale, Mr. Smith still must wait 2-3 years before he can buy using most traditional financing.
Mrs. Smith can qualify for a home on her own even though Mr. Smith had a short sale less than 2 years ago, provided she meets the standard qualification standards. Mrs. Smith would like to purchase the home with a FHA loan. In community property states, such as Arizona, Mrs. Smith can still purchase the home even though the lender will review Mr. Smith's credit history. However, any additional debts which appear on Mr. Smith's credit report will have to be included in her qualifying ratios. As long as she can qualify on her income alone, she will be able to purchase a home. Mr. Smith will have to sign a disclaimer deed, relinquishing all of his rights to the property.
Please note: This article was written per Arizona State laws and other states may differ. Please consult your mortgage consultant to discuss the laws and regulations applicable to your state.
About the Author
My name is David Krushinsky and I am a Phoenix mortgage specialist that is truly passionate about my profession and the result is that nearly 100% of my business is by referral from satisfied clients, trusted financial advisors and the most experienced REALTOR®'s in the Phoenix area.
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Very interesting - good to know...as short sales become more and more common I'm sure this type of situation will be coming into play as well.
I think many buyers have counted on this and planned it prior to letting their home go.
David- I agree with the information in your blog but I would also say this will soon be a thing of the past. The buy & bail mentality is strong & I believe FHA will start to crack down on folks who's spouses recently had a foreclosure or short sale. FHA understands that married folks usually work as a team financially. If they let their primary residence go via short sale & want to buy another the wave of the future is that FHA underwriters will look at the circumstances relating to the short sale of the spouse & pick that file apart. If it was a short sale due to relocation, death or divorce then I can see exceptions being made. However, if it was their primary residence & only one spouse on the loan & then they let it go and want to buy another? hmm
As a former underwriter this type of transaction has red flags all over it.
So get the deals done now before they change the guidelines on us, again!
re-blogged
Hi David, thanks for the excellent post. The question is an important one.
David, great info. I reblogged you and suggested you for feature, too.
Good info David. I actually ran into this recently and a few of the banks I worked with would not allow this to happen because Arizona is a community property state. It seems as though this may start to fall into one of those guidelines considered as risk layering that the banks impose themselves. When will the madness stop?
I agree!
Your credit is not your spouse's credit, and your spouse's credit is not your credit.
Dave - In Arizona, we are required to pull a spouses credit report for all government loans.